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Don’t make the biggest buy to let mistake
3 September 2015
The biggest mistake most buy to let investors make is to go into their project eyes shut without thinking about the business consequences of their decisions.
Buying a house is a major capital outlay that comes with responsibilities that cost money to maintain.
Purchasing a letting property because you would like to live there is not a good basis for doing business.
Instead, think about demand and location. You need to know who your tenants are likely to be, the rent the property will command on the market and factors like is the property near the shops, schools, doctors and public transport.
Then there are hidden costs new landlords often overlook:
• Standalone profits – Property investors should not have to dip into the profits coming from other property or their day job earnings to subsidise running costs. If a letting property does not generate enough cash to pay the bills, it probably is not a good investment
• Working capital – Few buy to lets are suitable for tenants from day one and will need some refurbishment and money in the bank to pay the mortgage, letting agent charges , council tax, utilities and a myriad of other costs before the tenant moves in. This money should be earmarked in the bank before completing the purchase
• Contingency cash – A buy to let will need a certain amount of maintenance over the year, safety certificates and unforeseen repairs, such as missing roof tiles and plumbing leaks. Write-off an amount each month to set aside for these expenses
• Rent voids – Tenants move on and landlords will have void periods of up to three months a year. This cost should be covered by the contingency fund
• Tax – Rental profits or gains in property value on sales do not belong to the landlord. They are gross profits which tax is paid from, so do not forget to run the figures to see what hidden liabilities you may have
That buy to let may look a bargain, but never commit to exchanging contracts before sitting down and working out the net figures – ignore what the estate agent says and make your own inquiries elsewhere because the agent works for the seller, not you.